M-RCBG Associate Working Paper No. 7

It is Easy to Be Brave From a Safe Distance: Distance to the SEC and Insider Trading

Trung Thi Hoai Nguyen

2012

Abstract

This paper uses hand-collected data from SEC’s litigation releases for insider trading violations to examine the effect of geographic distance on the SEC’s investigation and on corporations’ insider trading activities. First, I find that the SEC is more likely to investigate companies that are closer to its offices. Second, I document that illegal insider trading activities at a company increases with distance to the nearest SEC office. Lastly, utilizing the closure of the Houston and Seattle SEC offices as exogenous shocks to the distance between a company and its nearest SEC office, and using a difference-in-difference estimation approach, I find that the increase in illegal trading activities associated with companies that had either of these two offices as their closest SEC office is significantly larger than at otherwise similar companies not affected by the closures. Overall, my findings show that insiders’ behavior is consistent with criminal decision theory, and suggest that information asymmetry and resource constraints prevent regulators from monitoring efficiently.